A semiannual payment bond with a $1,000 par has a 7% coupon rate, a 6% YTM, and 5 years to...

Question:

A semiannual payment bond with a $1,000 par has a 7% coupon rate, a 6% YTM, and 5 years to maturity. What is the bond's duration?

Bond Duration:

Bond duration is a statistics that measures a bond's interest rate risk, i.e., how sensitive bond value is with respect to changes in interest rate. Two commonly used Duration measures are the Macaulay duration and the modified duration.

Answer and Explanation:

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The duration of the bond is 4.32 years.

We can use the following formula to compute the Macaulay duration:

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Interest Rate Risk: Definition, Formula & Models

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Chapter 3 / Lesson 6
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Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.


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